Dodd-Frank is dead

March 19th, 2018

But, a repeal of Dodd-Frank is not without its downside risks and upside benefits for gold and silver investors.

The 2010 enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) will be eviscerated when the House passes an amendment to the law. Because the Senate passed the amendment with a bipartisan vote, the House is expected to pass it quickly and the President is expected to sign it even quicker.

Rolling back Dodd-Frank is part of President Trump’s reduction in regulations that inhibit economic growth. One analyst said that it “has the potential to contribute greatly toward Trump’s goal of at least 3 percent economic growth.” Complying with Dodd-Frank became an onerous burden for regional and community banks.

A modified Dodd-Frank will provide much-needed relief to smaller lenders and community banks — those with less than $10 billion in assets — which provide about 44% of lending to US farms. Further, nearly half of all small business loans in the US, and more than 15 percent of all residential mortgages, are issued by small banks.

Dodd-Frank was rammed through Congress during Obama’s first term in a rush to “prevent future” financial disasters that surfaced in the 2008 World Financial Crisis. When now-defunct investment bank Bear Stearns was headed for failure 10 years ago, the Fed arranged an emergency loan of nearly $13 billion routed through JPMorgan.

The Fed also agreed to purchase $30 billion in Bear assets. But now, because of the soon-to-be amended Dodd-Frank, such assistance will be illegal since the changes stipulate Fed lending must be broad-based and not directed toward a single institution.

This ruling means if large firms get in trouble, a Fed bailout will be very difficult. Some very huge bankruptcies could be on the horizon.

Consider also that corporate debt relative to US GDP has returned to pre-recession levels, a risk made scarier by rising interest rates. Further, US household debt hit a new high of $13.15 trillion 4qtr 2017. One misstep and we could see another World Financial Crisis.

With the Fed determined (Is it really?) to raise interest rates, bankruptcies and a recession could be in our future, regardless of how many regulations that President Trump gets eliminated. Such a climate will be better for goldand silverthan for stocks.

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